TAX ATTORNEY AND CPA

THOMAS F. DILULLO ESQ.

C.P.A., M.B.A., J.D., AND LL.M.

Specializing In Personal & Business Income Tax Law For Over 30 Years


Part 5. Collecting Process

Chapter 8. Offer in Compromise

Section 11. Effective Tax Administration

5.8.11  Effective Tax Administration

5.8.11.1 Overview
5.8.11.2 Legal Basis for Effective Tax Administration Offer
5.8.11.3 Initial Processing of Effective Tax Administration Offers
5.8.11.4 Evaluation of Offers
5.8.11.5 Documentation and Verification
5.8.11.6 Final Processing
Exhibit 5.8.11-1 Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet

5.8.11.1  (09-01-2005)
Overview

  1. As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:

    • Hardship,

    • Public policy, and

    • Equity

    Treasury Regulation § 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.

  2. The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:

    • Believe the laws are fair and equitable, and

    • Gain confidence that the laws will be applied to everyone in the same manner.

    The Effective Tax Administration (ETA) offer allows for situations where tax liabilities should not be collected even though:

    • The tax is legally owed, and

    • The taxpayer has the ability to pay it in full.

  3. If a taxpayer submits an Effective Tax Administration (ETA) offer, first investigate the offer for:

    • Doubt as to Liability (DATL), and/or

    • Doubt as to Collectibility (DATC).

    An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC).
    The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA).

  4. Economic hardship standard of § 301.6343-1 specifically applies only to individuals.

5.8.11.2  (09-01-2005)
Legal Basis for Effective Tax Administration Offer

  1. Compared to Doubt as to Collectibility (DATC)
    In a Doubt as to Collectibility (DATC) offer, the tax liability equals or exceeds the taxpayers reasonable collection potential (RCP) which is:

    • Net equity, plus

    • Future income

    In an Effective Tax Administration (ETA) offer, the tax liability is less than the taxpayers reasonable collection potential (RCP). The taxes owed can be collected in full either:

    • In a lump sum, or

    • Through an installment agreement (IA)

    A Doubt as to Collectibility (DATC) offer does not convert to an Effective Tax Administration (ETA) offer if the Offer Investigator and the taxpayer cannot agree on an acceptable offer amount.

  2. Compared to Doubt as to Collectibility with Special Circumstances (DCSC)
    Taxpayers may qualify for an Effective Tax Administration (ETA) offer when their reasonable collection potential (RCP) is greater than the liability but there are economic or public policy/equity circumstances that would justify accepting the offer for an amount less than full payment.

    Example:

    The taxpayer owes $20,000. The reasonable collection potential (RCP) is $25,000. The taxpayer could have an offer accepted for less than the total liability of $20,000 under the Effective Tax Administration (ETA) provisions if economic hardship, or public policy/equity issues exist which would support an acceptance recommendation.

    Taxpayers could have an offer accepted under Doubt as to Collectibility with Special Circumstance (DCSC) when their reasonable collection potential (RCP) is less than their liability, but there are economic hardship or public policy/equity factors that would justify accepting the offer for an amount less than the reasonable collection potential (RCP).

    Example:

    The taxpayer owes $20,000. However his reasonable collection potential (RCP) is $15,000. The offer does not meet the legal basis for an Effective Tax Administration (ETA) because the RCP is lower than the liability. However, applying the same factors of economic hardship, or public policy/equity, an offer could be accepted for less than the RCP ($15,000) under Doubt as to Collectibility with Special Circumstance (DCSC) provisions.

  3. Compared to Doubt as to Liability
    An offer can be considered under Effective Tax Administration (ETA) provisions only when there are no doubt to liability issues.

  4. In reaching these determinations:

    If… Then…
    The Service determines that there is doubt as to the amount of the liability the taxpayer owes Taxpayer is not eligible for Effective Tax Administration (ETA) consideration. The offer is considered based on the Doubt as to Liability (DATL) issue.
    The Service determines that the taxpayers equity in assets plus future income (RCP) does not exceed the amount of the tax liability Taxpayer is not eligible for an Effective Tax Administration (ETA) offer. The offer is considered based on Doubt as to Collectibility (DATC).
    However, hardship or public policy/equity may be present in the case to allow consideration under Doubt as to Collectibility with Special Circumstances (DCSC).
    The Service determines the taxpayer is not eligible for compromise based on Doubt as to Liability (DATL) or Doubt as to Collectibility (DATC) and the taxpayer can demonstrate that collection of the tax liability in full would create economic hardship, or demonstrate that there is compelling public policy or equity issues in the case that would provide sufficient basis for compromise The taxpayer would be eligible for Effective Tax Administration (ETA) consideration.
  5. Before we can consider a compromise based on economic hardship or public policy/equity considerations, three factors must exist:

    1. A liability has been or will be assessed against taxpayer(s) before acceptance of the offer.

    2. The net equity in assets plus future income or reasonable collection potential (RCP) must be greater than the amount owed.

    3. Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.

5.8.11.2.1  (09-01-2005)
Economic Hardship

  1. When a taxpayers liability can be collected in full but collection would create an economic hardship, an Effective Tax Administration (ETA) offer based on economic hardship can be considered.

  2. The definition of economic hardship as it applies to Effective Tax Administration (ETA) offers is derived from Treasury Regulations § 301.6343-1. Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. The determination of a reasonable amount for basic living expenses will be made by the Commissioner and will vary according to the unique circumstances of the individual taxpayer. Unique circumstances, however, do not include the maintenance of an affluent or luxurious standard of living.

    Note:

    Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietorship entities). Compromise on economic hardship grounds is not available to corporations, partnerships, or other non-individual entities.

  3. The taxpayers financial information and special circumstances must be examined to determine if they qualify for an Effective Tax Administration (ETA) offer based on economic hardship. Financial analysis includes reviewing basic living expenses as well as other considerations.

  4. The taxpayers income and basic living expenses must be considered to determine if the claim for economic hardship should be accepted. Basic living expenses are those expenses that provide for health and welfare and production of income of the taxpayer and the taxpayers family. Some basic living expenses are limited to the National Standards while other expenses are limited to Local Standards. Deviation from these standards is permissible if and when the taxpayer is able to justify expenses that exceed these limits.

  5. In addition to the basic living expenses, other factors to consider that impact upon the taxpayers financial condition include:

    • The taxpayers age and employment status,

    • Number, age, and health of the taxpayers dependents,

    • Cost of living in the area the taxpayer resides, and

    • Any extraordinary circumstances such as special education expenses, a medical catastrophe, or natural disaster.

    Note:

    This list is not all-inclusive. Other factors may be considered in making an economic hardship determination.

  6. Factors that support an economic hardship determination may include:

    1. The taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that the financial resources will be exhausted providing for care and support during the course of the condition.

    2. The taxpayer may have a set monthly income and no other means of support and the income is exhausted each month in providing for the care of dependents.

    3. The taxpayer has assets, but is unable to borrow against the equity in those assets, and liquidation to pay the outstanding tax liabilitie(s) would render the taxpayer unable to meet basic living expenses.

    Note:

    These factors are representative of situations the Service regularly encounters when working with taxpayers to resolve delinquent accounts. They are not intended to provide an exhaustive list of the types of cases that can be compromised based on economic hardship.

  7. Compromise under the Effective Tax Administration (ETA) economic hardship provision is permissible if acceptance does not undermine compliance. The public should not perceive that the taxpayer whose offer is accepted benefited by not complying with the tax laws. Factors supporting a determination that compromise would undermine compliance include, but are not limited to:

    • The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.

    • The taxpayer has taken deliberate actions to avoid the payment of taxes.

    • The taxpayer has encouraged others to refuse to comply with the tax laws.

    Note:

    There may be other situations where compromise would be undermined.

  8. The following examples illustrate the types of cases that may be compromised under the economic hardship standard.

    Example:

    The taxpayer has assets sufficient to satisfy the tax liability and provides full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that the taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. The taxpayers overall compliance history does not weigh against compromise.

    Example:

    The taxpayer is retired and the only income is from a pension. The only asset is a retirement account and the funds in the account are sufficient to satisfy the liability. Liquidation of the retirement account would leave the taxpayer without adequate means to provide for basic living expenses. The taxpayers overall compliance history does not weigh against compromise.

    Example:

    The taxpayer is disabled and lives on a fixed income that will not, after allowance of adequate basic living expenses, permit full payment of the liability under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate for a disability. The equity in the house is sufficient to permit payment of the liability owed. However, because of the disability and limited earning potential, the taxpayer is unable to obtain a mortgage or otherwise borrow against this equity. In addition, because the taxpayers home has been specially equipped to accommodate the disability, forced sale of the taxpayers residence would create severe adverse consequences for the taxpayer, making such a sale unlikely. The taxpayers overall compliance history does not weigh against compromise.

  9. The economic hardship standard authorizes compromise regardless of the cause of the liability, provided compromise does not undermine compliance by other taxpayers.

    Example:

    The taxpayer submitted an Effective Tax Administration (ETA) offer based on economic hardship. The financial statement appears to support the offer. When a research of the county property records is conducted, it is noted that the home was transferred to a child for $100 plus love and affection. The transfer of the home was made after the tax was assessed. It is confirmed that deliberate actions were taken to avoid the payment of tax; therefore, the offer should not be accepted.

  10. In economic hardship cases, an acceptable offer amount is determined by analyzing the financial information, supporting documentation, and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

    Example:

    The taxpayer was diagnosed with an illness that eventually will hinder any ability to work. Although currently employed, the taxpayer will soon be forced to quit their job and use personal funds for basic living expenses. The taxpayer owes $100,000 and has a reasonable collection potential of $150,000. An offer was submitted for $35,000. Through the investigation, it is determined that collecting more than $50,000 would cause an economic hardship for the taxpayer since it would hinder the ability to meet reasonable living expenses, including ongoing medical expenses. The taxpayer is advised to raise the offer to $50,000 since it is an amount the Service can collect without creating an economic hardship.

  11. The existence of economic hardship criteria does not dictate that an offer must be accepted. An acceptable offer amount must still be determined based on a full financial analysis and negotiation with the taxpayer. When hardship criteria are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.

5.8.11.2.2  (09-01-2005)
Public Policy or Equity Grounds

  1. Where there is no Doubt as to Liability (DATL), no Doubt as to Collectibility (DATC), and the liability could be collected in full without causing economic hardship, the Service may compromise to promote Effective Tax Administration (ETA) where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment. Compromise is authorized on this basis only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner. Because the Service assumes that Congress imposes tax liabilities only where it determines it is fair to do so, compromise on these grounds will be rare.

  2. The Service recognizes that compromise on these grounds will often raise the issue of disparate treatment of taxpayers who can pay in full and whose liabilities arose under substantially similar circumstances. Taxpayers seeking compromise on this basis bear the burden of demonstrating circumstances that are compelling enough to justify compromise notwithstanding this inherent inequity.

  3. Compromise on public policy or equity grounds is not authorized based solely on a taxpayers belief that a provision of the tax law is itself unfair. Where a taxpayer is clearly liable for taxes, penalties, or interest due to operation of law, a finding that the law is unfair would undermine the will of Congress in imposing liability under those circumstances.

    Example:

    The taxpayer argues that collection would be inequitable because the liability resulted from a discharge of indebtedness rather than from wages. Because Congress has clearly stated that a discharge of indebtedness results in taxable income to the taxpayer it would not promote Effective Tax Administration (ETA) to compromise on these grounds. See Internal Revenue Code (IRC) 61(a)(12).

    Example:

    In 1983, the taxpayer invested in a nationally marketed partnership which promised the taxpayer tax benefits far exceeding the amount of the investment. Immediately upon investing, the taxpayer claimed investment tax credits that significantly reduced or eliminated the tax liabilities for the years 1981 through 1983. In 1984, the IRS opened an audit of the partnership under the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). After issuance of the Final Partnership Administrative Adjustment (FPAA), but prior to any proceedings in Tax Court, the IRS made a global settlement offer in which it offered to concede a substantial portion of the interest and penalties that could be expected to be assessed if the IRS's determinations were upheld by the court. The taxpayer rejected the settlement offer. After several years of litigation, the partnership level proceeding eventually ended in Tax Court decisions upholding the vast majority of the deficiencies asserted in the FPAA on the grounds that the partnership's activities lacked economic substance. The taxpayer has now offered to compromise all the penalties and interest on terms more favorable than those contained in the prior settlement offer, arguing that TEFRA is unfair and that the liabilities accrued in large part due to the actions of the Tax Matters Partner (TMP) during the audit and litigation. Neither the operation of the TEFRA rules nor the TMP's actions on behalf of the taxpayer provide grounds to compromise under the equity provision of paragraph (b)(4)(i)(B) of this section. Compromise on those grounds would undermine the purpose of both the penalty and interest provisions at issue and the consistent settlement principles of TEFRA. Depending on the taxpayers particular facts and circumstances, however, compromise may be authorized on the grounds of Doubt as to Collectibility (DATC), or because collection of the full liability would cause an economic hardship within the meaning of paragraph (b)(4)(i)(A) of this section.

    Note:

    In both of these examples, the taxpayers are essentially claiming that Congress enacted unfair statutes and are arguing that the Service should use its compromise authority to rewrite those statute based on a perception of unfairness. Compromise for that reason would not promote effective tax administration. The compromise authority under Section 7122 is not so broad as to allow the Service to disregard or override the judgments of Congress.

  4. Section 6404(e) grants the Service the discretion to abate interest attributable to certain errors and delays by the Service. It would not promote Effective Tax Administration (ETA) to compromise a liability based solely on an assertion of delay by the Service if that delay would not support relief from interest under section 6404(e).

  5. Compromise may promote Effective Tax Administration (ETA) where the taxpayer was incapacitated and thus unable to comply with the tax laws.

    Example:

    In October 1986, the taxpayer developed a serious illness that resulted in almost continuous hospitalization for a number of years. The medical condition was such that during this period, the taxpayer was unable to manage any of their financial affairs. The taxpayer has not filed tax returns since that time. The taxpayers health has now improved and has promptly begun to attend to tax matters. The taxpayer discovered that the IRS prepared a substitute for return for the 1986 tax year based on information documents received and assessed a tax deficiency. When the taxpayer discovered the liability, with penalties and interest, the tax bill was more than three times the original tax liability. The taxpayers overall compliance history does not weigh against compromise.

    Note:

    In this situation, the Service should first work with the taxpayer and attempt to prepare an accurate return for the 1986 tax year and adjust the taxpayers account accordingly. Following that, the Service should consider accepting a compromise that would approximate the amount the taxpayer would have been assessed had there been an ability to comply with his filing and payment responsibilities in a timely manner. Such a compromise would be fair and equitable to the taxpayer and, under these circumstances, would advance the public policy of voluntary compliance with the tax laws.

  6. It would not promote Effective Tax Administration (ETA) to compromise with the taxpayer in (5), above, if the investigation revealed that the taxpayer was able to attend to matters other than those due in 1986 during the time of the illness. For example, assume the taxpayer discussed, paid all other bills and continued to successfully operate a business during the illness. Under such circumstances, compromise would not promote Effective Tax Administration (ETA), and could serve to undermine compliance by other taxpayers.

  7. Compromise may promote Effective Tax Administration (ETA) where the taxpayers liability was caused by reasonable reliance on a statement issued by the Service that caused the taxpayer to incur a tax liability that would not otherwise have been incurred.

    Example:

    The taxpayer is a salaried sales manager at a department store who has been able to place $2,000 in a tax-deductible IRA account for each of the last two years. The taxpayer learns that a higher rate of interest can be earned on his IRA savings by moving the savings from a Money Management account to a Certificate of Deposit at a different financial institution. Prior to transferring the savings, the taxpayer submits an E-mail inquiry to the IRS at its Web Page, requesting information about the steps needed to preserve the tax benefits currently enjoyed and to avoid any penalty. The IRS responds by answering the E-mail that the taxpayer may withdraw the IRA savings from the neighborhood bank, but it must redeposited in a new IRA account within 90 days. The taxpayer withdraws the funds and redeposits them in a new IRA account 63 days later. Upon audit, the taxpayer learns that he has been misinformed about the required rollover period and is now liable for additional taxes, penalties and interest for not redepositing the amount within 60 days. Had the advice provided been accurate, the taxpayer would have redeposited the funds timely. The taxpayer retained a copy of the IRS E-mail for his records. The taxpayers overall compliance history does not weigh against compromise.

    Note:

    Because the tax liability in this example was caused by relying on the Service's erroneous statement, and the taxpayer clearly could have avoided the liability had the Service given correct information, it is reasonable to conclude that collection in full would cause other taxpayers to question the fairness of the tax system. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the service not made an error.

  8. Compromise may also promote Effective Tax Administration (ETA) where a taxpayers liability was directly caused by the Service and through no fault of the taxpayer.

    Example:

    The taxpayer is a closely-held corporation. The IRS audited the taxpayers tax returns for 1996, 1997, and 1998 and determined that the taxpayer was a personal holding company liable for personal holding company tax. The taxpayer agreed to immediate assessment of the tax, but attempted to take advantage of the deduction for deficiency dividends under section 547. Although the taxpayer made the distributions necessary to qualify for the deduction, the IRS made several errors in executing the required agreements and other paperwork. As a result, the taxpayer could not avail itself of the section 547 deduction. Under the statute, applicable regulations, and pertinent case law, there is no means by which the mistakes can be corrected to allow the taxpayer to take advantage of the deduction. There is documentary evidence that all of the required Service officials intended to complete the processing of the agreements and that, but for their failure to do so, the taxpayer would have qualified for the deduction. The taxpayer has no prior history of noncompliance.

    Note:

    That the tax liability was caused solely by an error on the part of the Service supports the determination that collection in full would cause other taxpayers to question the fairness of the tax system. Furthermore, the policies underlying the imposition of the personal holding company tax and the rules regarding deficiency deductions are not undermined by compromise under these circumstances. The Service may consider accepting a compromise that would reflect the amount the taxpayer would now owe had the Service not made an error.

  9. In contrast, compromise would not be authorized based on mistakes by the Service that did not cause the tax liability. For example, providing an incorrect statement of the balance due does not authorized the compromise of additional interest that may have later accrued. However, any relief from interest attributable to errors or delays by the Service should be granted under the standards set forth in section 6404(e). Compromise that would undermine those standards would not promote Effective Tax Administration (ETA). Similarly, relief from penalties attributable to errors by the Service should be granted pursuant to the standards for relief set forth in section 6404(e) and the IRM.

  10. The Service will not compromise on public policy or equity grounds based solelyon the argument that the acts of a third party caused the unpaid tax liability. Third parties include the taxpayers:

    • Representative,

    • Partner,

    • Agent, or

    • employee

    Note:

    The actions of a third party may be part of a fact pattern that, viewed as a whole, presents compelling public policy or equity concerns justifying compromise. As with all compromises based on public policy or equity, the taxpayers situation must be compelling enough to justify compromise even though similarly situated taxpayers may have paid in full.

  11. Compromise on public policy or equity grounds promotes Effective Tax Administration (ETA) only where it does not undermine compliance by other taxpayers. In general, compromise would undermine compliance where other taxpayers viewing the compromise may conclude that the taxpayer benefited from a failure to comply with the tax laws (i.e. the result of the compromise places the taxpayer in a position better than they would occupy had they timely and fully met their obligations). Such cases present the danger that other taxpayers may consider it beneficial to take the chance of not complying with the tax laws or litigating an issue they would otherwise concede or settle, and relying on compromise at some later date as a safety net. Factors supporting a determination that compromise would undermine include, but are not limited to:

    • The taxpayer has a history of noncompliance with the filing and payment requirements of the Internal Revenue Code.

    • The taxpayer has taken deliberate actions to avoid the payment of taxes.

    • The taxpayer has encouraged others to refuse to comply with the tax laws.

      Note:

      Additional factors such as the cause of the delinquency, length of non-compliance, and efforts to resolve non-compliance should also be considered. Generally a review of the last 3–5 years of compliance should be completed.

  12. Once it has been determined that a case raises compelling public policy or equity considerations justifying compromise, the Service must still determine whether the amount offered by the taxpayer should be accepted to resolve the case. An acceptable offer amount should be based on a determination of what is fair and equitable under the circumstances. When public policy or equity considerations are identified but the taxpayer does not offer an acceptable amount, the offer should not be recommended for acceptance.

5.8.11.2.3  (09-01-2005)
Compromise Would Not Undermine Compliance With Tax Laws

  1. No compromise to promote Effective Tax Administration (ETA) may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws. See IRM 5.8.11.2.1(7), 5.8.11.2.1(9) and 5.8.11.2.2(11) above, for additional information.

5.8.11.3  (09-01-2005)
Initial Processing of Effective Tax Administration Offers

  1. Offers submitted on the grounds of Effective Tax Administration (ETA) will be worked either by the COIC units or field specialists.

  2. Taxpayers seeking a compromise under Effective Tax Administration (ETA) will submit the Form 656, Offer in Compromise, selecting ETA in Item 6, along with the Collection Information Statement (CIS) (Form 433-A and/or Form 433-B). Taxpayers must complete the Form 656, Item 9 and document their special circumstances. The documentation should explain why collection of the liability in full would cause economic hardship, or the public policy/equity issues present that would justify compromising the liability. An additional attachment can be provided if additional space is needed. If the taxpayer does not submit a financial statement with the offer, normal correspondence activity should be undertaken to secure the financial statement, and any other data determined necessary for evaluation of the offer. If the taxpayer fails to provide the requested information, normal "return" procedures should be followed since Effective Tax Administration (ETA) criteria can not be considered until all other bases have been addressed.

  3. Like all other offers, the Service will only consider an Effective Tax Administration (ETA) offer when taxpayers have met the processability criteria (e.g. paid the application fee or filed Form 656-A; filed all required tax returns; submitted the Form 656, Form 433-A and/or Form 433-B on the latest revision of the forms; and are not a debtor in a bankruptcy proceeding). In-business taxpayers must have timely filed and timely deposited their quarterly federal taxes for the 2 preceding quarters and paid all federal tax deposits during the quarter in which the offer was filed.

    Note:

    Follow IRM 5.8.3, Processability Determination, for initial processing of offers.

  4. Elements necessary to perfect an offer also apply to Effective Tax Administration (ETA) offers. The requirement to submit complete financial statements for ETA offers is the same as for Doubt as to Collectibility (DATC) offers.

    Note:

    Follow IRM 5.8.3.11, Types of Perfection, for procedures on perfecting offers.

  5. Effective Tax Administration (ETA) offers are initially added to AOIC as Doubt as to Collectibility (DATC) offers. Once the offer investigation reveals that the taxpayers assets and future income exceed the tax liability thereby indicating no basis for a Doubt as to Collectibility (DATC), the offer should be considered under the ETA provisions. AOIC must be updated to reflect the correct basis for the compromise (e.g. ETA). Refer to IRM 5.8.11.7 below for a full discussion of requirements to update AOIC prior to final processing of ETA and Doubt as to Collectibility with Special Circumstances (DCSC) offers.

5.8.11.4  (09-01-2005)
Evaluation of Offers

  1. Effective Tax Administration (ETA) offers cannot be considered if the taxpayer qualifies for Doubt as to Collectibility (DATC) or Doubt as to Liability (DATL).

    Note:

    Follow IRM 5.8.4, Evaluation of Offers, for Doubt as to Collectibility (DATC) issues and determining reasonable collection potential (RCP).

  2. If the assets and future income do not exceed the tax liability and special circumstances exist, the taxpayers offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC). The taxpayers may have checked the ETA box and given an explanation of circumstance on the Form 656, however unless they have the ability to full pay the liability, the offer would not meet the legal standard for Effective Tax Administration (ETA) consideration. The offer must be considered under Doubt as to Collectibility with Special Circumstance (DCSC).

  3. If the taxpayer submits an offer based on Doubt as to Collectibility (DATC) but collection potential exceeds the liability and there are special circumstances, the offer should be considered on the basis of Effective Tax Administration (ETA). The employee that investigates the offer is required to address any potential special circumstances during first contact with the taxpayer or the taxpayers representative. This will be accomplished in conjunction with the current requirement to verify receipt of Publication 1 and Publication 594 and must be documented in the offer case history. This requirement does not apply where the only taxpayer contact is through correspondence.

  4. If the offer is rejected, the narrative should describe the considerations of both bases. If the offer is accepted the offer report must reflect the basis upon which the offer is accepted.

5.8.11.4.1  (09-01-2005)
Public Policy/Equity Issues

  1. Offers submitted under the Public Policy/Equity provisions are authorized under these guidelines only when there are exceptional circumstances. While compromise under these guidelines is expected to be rare, appropriate recommendations for acceptance will be made.

  2. In order to develop consistency in the interpretation and application of Treasury Regulations (TD 9007) published on July 22, 2002, a Specialty Group has been set up in Austin, Texas to work these offers.

  3. Only after consideration has been given to all other potential bases for acceptance (e.g. Doubt as to Liability (DATL), Doubt as to Collectibility (DATC), Doubt as to Collectibility with Special Circumstance (DCSC), and/or Effective Tax Administration (ETA) based on economic hardship) will ETA-Public Policy/Equity be considered. Therefore, all cases must have been completely developed under all other bases before transfer will be accepted by the Austin Group.

  4. After all other potential bases have been considered, complete Exhibit 5.8.11-1 "Non-Economic Hardship Effective Tax Administration (ETA) OIC Check Sheet." The check sheet must be completed and sent to the Austin group before any cases are transferred. The purpose of the check sheet is to document that all issues other than Public Policy/Equity ETA have been evaluated and to provide information on the non-economic ETA factors present.

  5. The completed check sheet and a copy of the entire Form 656 should be faxed to offer Group Manager in Austin. The sender should include a copy of any letter or document presented by the taxpayer to support the special circumstances. The group will evaluate the information and respond to the sender within 10 workdays. This response will either be an explanation of why the taxpayers offer cannot be investigated under Public Policy/Equity ETA provisions, or a request to transfer the offer to the Austin group.

  6. If the Austin group determines that the offer cannot be investigated under the Public Policy/Equity ETA provisions, the information will be faxed back to the sender who will be responsible for issuing the proposed rejection letter to the taxpayer, covering all factors considered.

  7. If the Austin group determines that the information presented requires further analysis, the sender will be notified to transfer the case to Austin.

    • The sender should contact the taxpayer by telephone and advise the taxpayer of the results of the collectibility and liability portions of the offer investigation prior to transfer. If the taxpayer cannot be reached by phone then a standard transfer letter should be sent.

    • The file should be sent by overnight mail on Form 3210 to the Austin group.

    • At the time of mailing, the case should be transferred on AOIC to Area 10.

    • A history item should be added to AOIC to show the case is being sent to Austin, Area 10.

    • The Austin group will maintain the faxed copies of all check sheets received and appropriate documentation on all offers accepted for transfer. This documentation will provide a historical record to support a decision to accept or reject the offer.

    Note:

    The Offer Examiner or Offer Specialist may also seek guidance from the Austin group on a Doubt as to Collectibility with Special Circumstances (DCSC) offers that involve Public Policy/Equity issues. The guidance should be solicited by preparing the check sheet and documenting the issues involved in the case. However, these cases will not be transferred to the Austin group.

5.8.11.4.2  (09-01-2005)
Financial Statement Analysis

  1. Offers submitted under Effective Tax Administration (ETA) require the same full financial analysis as Doubt as to Collectibility (DATC) offers in order to determine reasonable collection potential (RCP) and to determine an acceptable offer amount. Procedures for financial analysis are contained in IRM 5.8.5, Financial Analysis.

  2. Once reasonable collection potential (RCP) is completed a determination can be made as to whether the offer qualifies for consideration under Effective Tax Administration (ETA) or Doubt as to Collectibility (DATC).

  3. If the taxpayers assets and future income exceed the tax liability, the taxpayers offer can be considered under the Effective Tax Administration (ETA) basis.

5.8.11.4.3  (09-01-2005)
Determining an Acceptable Offer Amount

  1. An acceptable offer amount, based on economic hardship, is determined by analyzing the financial information and the hardship that would be created if certain assets, or a portion of certain assets, were used to pay the liability.

    Example:

    The taxpayer has a $100,000 liability and a reasonable collection potential (RCP) of $125,000. To avoid economic hardship, it is determined that the taxpayer will need $75,000. The remaining $50,000 should be considered the acceptable offer amount.

  2. In offers based on Public Policy/Equity, the Service would expect the taxpayer to offer an amount that is fair and equitable under the circumstances.

  3. Generally, it is the responsibility of the taxpayer to make decisions and take the appropriate actions needed to fund the acceptable offer amount. However, due consideration of these funding options is often needed for the Service to arrive at an acceptable offer amount. For example, in some locations the availability of funding options such as reverse mortgages, assigning deeds of trust, etc. may allow the taxpayer to tap into available equity without creating economic hardship. These options should be taken into consideration in determining an acceptable offer amount for an Effective Tax Administration (ETA) offer based on economic hardship.

5.8.11.5  (09-01-2005)
Documentation and Verification

  1. To verify the taxpayers special circumstances and support a basis of Effective Tax Administration (ETA):

    1. Request supporting documentation of the taxpayers situation. Exercise sound judgement in determining the degree of verification necessary. For example, verification of a health problem could be a doctor’s letter or copies of medical expenses.

    2. When special circumstances are found to exist, the amount offered will be less than reasonable collection potential (RCP). For Effective Tax Administration (ETA), reasonable collection potential (RCP) is always greater than the full liability. In the report narrative, explain clearly the rationale for acceptance of the amount offered. The documentation must include reasons why some or all of the equity in certain assets is not being offered, how the offer amount is being funded, and any other pertinent information that indicates how the amount offered was determined to be acceptable.

5.8.11.6  (09-01-2005)
Final Processing

  1. Prior to final processing, AOIC must be updated to indicate the correct basis for closing the offer. This will ensure that all final closing reports generated from AOIC reflect the correct basis. The approval levels indicated on closing reports and letters must be consistent with the basis for closure.

  2. The following is a guide to these determinations:

    If… And… Then…
    The offer was submitted under Effective Tax Administration (ETA) An economic hardship has been determined to exist, but the reasonable collection potential (RCP) is less than the liability balance due 1. Update the AOIC offer screen to indicate a "C" under the offer type.
    2. Generate all closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
    The offer was submitted under Doubt as to Collectibility (DCSC) An economic hardship has been determined to exist, and the reasonable collection potential (RCP) is greater than the liability balance due 1. Update AOIC offer screen to indicate "A" under offer type.
    2. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
    The offer was submitted under Effective Tax Administration (ETA) The offer is being recommended for acceptance under Doubt as to Collectibility (DATC) with the offer exceeding the reasonable collection potential (RCP) 1. AOIC offer screen does not require updating for special circumstances. The type of offer on AOIC should reflect "C" for Doubt as to Collectibility (DATC).
    Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances.
    The offer was submitted under Doubt as to Collectibility with item 9 of Form 656 completed with circumstances that do not meet any of the elements that define economic hardship, or Public Policy/Equity criteria The offer cannot be recommended for acceptance under Doubt as to Collectibility (DATC). Generate closing reports with the proper approving official for Doubt as to Collectibility (DATC) without special circumstances. Address in the history, why the circumstances described in item 9 do not meet defined economic hardship, or Public Policy/Equity criteria.
    The offer was submitted under Effective Tax Administration (ETA) with item 9 of Form 656 completed with circumstances that do not meet ETA criteria The taxpayer does not qualify for ETA because the reasonable collection potential (RCP) is less than the liability and the offer cannot be recommended for acceptance under Doubt as to Collectibility with Special Circumstances (DCSC). 1. Update AOIC offer screen to indicate a "C" under special circumstances.
    2. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).
    The offer was submitted under Effective Tax Administration (ETA) with item 9 of the Form 656 completed with circumstances that the investigation reveals do not meet ETA criteria The offer cannot be recommended for acceptance and the reasonable collection potential (RCP) exceeds the liability 1. Update AOIC offer screen to indicate "A" under offer type.
    3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
    The offer was submitted under Effective Tax Administration (ETA) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) exceeds the tax liability. However, the offer cannot be recommended for acceptance. 1. Update AOIC offer screen to indicate "A" under offer type.
    3. Generate closing reports with the proper approving official for Effective Tax Administration (ETA) offers.
    The offer was submitted under Doubt as to Collectibility with Special Circumstances (DCSC) The special circumstances do meet economic hardship, or Public Policy/Equity criteria and the reasonable collection potential (RCP) is less than the tax liability, however, the offer cannot be recommended for acceptance. Generate closing reports with the proper approving official for Doubt as to Collectibility with Special Circumstances (DCSC).

5.8.11.6.1  (09-01-2005)
Rejection/Return/Withdrawal Processing

  1. The procedures in IRM 5.8.7, Return, Terminate, Withdraw, and Reject Processing, discussing rejections, withdrawals and returns should be followed when processing Effective Tax Administration (ETA) rejected, withdrawn or returned offers.

  2. IRM 5.8.12, Independent Administrative Review, provides instructions for independent administrative review of rejected offers.

  3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 1271 and the closing letter.

5.8.11.6.2  (09-01-2005)
Acceptance Processing

  1. The procedures in IRM 5.8.8, Acceptance Processing , should be followed when processing accepted Effective Tax Administration (ETA) offers.

  2. Area Counsel’s opinion is required on ETA offers where the unpaid amount of tax assessed (including any interest, addition to the tax, or assessable penalty) is $50,000 or more.

  3. See Delegation Order No. 5-1 (formerly Delegation Order 11, Rev. 29) for the official with delegated authority to accept offers based on Effective Tax Administration (ETA). The delegated official’s signature is required on the Form 7249, Offer Acceptance Report, and the acceptance letter.

Exhibit 5.8.11-1  (09-01-2005)
Non-Hardship Effective Tax Administration (ETA) Offer in Compromise (OIC) Check Sheet

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